SEC Approves Amendments to TRACE Rules to Disseminate Transaction Information on All TRACE-Eligible Securities, Modify and Supplement Defined Terms, and Enhance Notification Requirements
Corporate Debt Securities
Dissemination of Transaction Information
Rule 6200 Series
On September 3, 2004, the Securities and Exchange Commission (SEC or Commission) approved amendments to Rule 6250, Rule 6210, and Rule 6260 of the Trade Reporting and Compliance Engine (TRACE) rules, the Rule 6200 Series.1 The most significant amendments, which are set forth in Rule 6250, effect a fundamental change in the corporate bond markets by requiring that information on all transactions in TRACE-eligible securities be disseminated, except those transactions in TRACE-eligible securities that are issued pursuant to Section 4(2) of the Securities Act of 1933 (Securities Act) and purchased or sold pursuant to Rule 144A under the Securities Act (Section 4(2)/Rule 144A TRACE-eligible securities).
In addition, NASD, amended two defined terms, "Investment Grade" and "Non-Investment Grade," and added a new defined term, "Split-rated," in Rule 6210; deleted provisions in Rule 6250 regarding market aggregate and last sale data and the treatment of certain transaction reports; and amended the notification provisions in Rule 6260 to require firms to provide information needed to implement various dissemination schedules. Rule 6250, Rule 6210, and Rule 6260, as amended, are set forth in Attachment A.
The amendments to the TRACE Rules will become effective in two stages (Stage One and Stage Two), on, respectively, October 1, 2004 and February 1, 2005. All of the amendments to Rules 6210 and 6260, and part of the amendments to Rule 6250, will become effective on October 1, 2004, as Stage One. The remainder of the amendments to Rule 6250 will become effective on February 1, 2005, as Stage Two. (A more detailed statement of the effective dates of various provisions of Rule 6250, as amended, is set forth below.)2
Questions concerning this Notice should be directed to [email protected]; Elliot Levine, Chief Counsel, Market Operations, Markets, Services and Information, at 202-728-8405; or Sharon K. Zackula, Associate General Counsel, Office of General Counsel, Regulatory Policy and Oversight, at 202-728-8985.
Currently, under Rule 6250(a), NASD disseminates transaction information on four categories of TRACE-eligible securities: (1) any Investment Grade TRACE-eligible security having an initial issuance size of $1 billion or greater; (2) approximately 50 Non- Investment Grade TRACE-eligible securities; (3) any TRACE-eligible security that is Investment Grade, is rated A or higher and has an original issue size of $100 million or greater, unless downgraded below BBB; and (4) approximately 120 TRACE-eligible securities rated BBB.3 All dissemination required under current Rule 6250(a) is "immediate"; NASD disseminates the transaction information as soon as it is reported to NASD.
Amended Rule 6250 will effect a fundamental change in the corporate bond markets as it is implemented by making publicly available for the first time pricing information on all transactions in publicly traded TRACE-eligible securities. Under Rule 6250, as amended, NASD will disseminate publicly transaction information for secondary market transactions in all TRACE-eligible securities, except transactions in Section 4(2)/Rule 144A TRACE-eligible securities. Pursuant to amended Rule 6250(b)(1), NASD will disseminate information immediately on approximately 99 percent of all transactions in TRACE-eligible securities and 95 percent of the par value traded in such securities.
The amended TRACE dissemination provisions are set forth in Rule 6250(a) through (c). Rule 6250(a) relates solely to delayed dissemination during the new issue aftermarket for TRACE-eligible securities rated BBB or lower. Rule 6250(b) sets forth the dissemination requirements for all other secondary market transactions in TRACEeligible securities—those occurring in the new issue aftermarket that are not subject to delayed dissemination, and all transactions occurring after the new issue aftermarket, whether subject to immediate or delayed dissemination. Finally, Rule 6250(c) codifies a staff interpretation that NASD will not disseminate information on transactions in Section 4(2)/Rule 144A TRACE-eligible securities.
The full text of the amendments providing for dissemination of transaction information on all TRACE-eligible securities (except Section 4(2)/Rule 144A TRACE-eligible securities) is set forth in Attachment A. The discussion below highlights, in Section A, only those provisions requiring delayed dissemination, which will apply to only one percent of all transactions in TRACE-eligible securities, and, in Section B, the single provision under which NASD will not disseminate transaction information.
- Transactions in newly issued BBB-rated TRACE-eligible securities that are executed during the first two business days after pricing will be disseminated beginning on the third business day.5 (The period of the first two business days after pricing is referred to as the New Issue Aftermarket-2.) Rule 6250(a)(1).
- Transactions in newly issued TRACE-eligible securities rated BB or lower that are executed during the first ten business days after pricing will be disseminated beginning on the eleventh business day.6 (The period of the first ten business days after pricing is referred to as the New Issue Aftermarket-10.) Rule 6250(a)(2).
- Transactions that are greater than $1 million (par value) in BB-rated TRACEeligible securities that trade an average of less than one time per day7 will be disseminated two business days from the time of execution.8Rule 6250(b)(2)(A).
- Transactions that are greater than $1 million (par value) in TRACE-eligible securities rated B or lower that trade an average of less than one time per day will be disseminated four business days from the time of execution.9Rule 6250(b)(2)(B).
Under amended Rule 6250(c), NASD will not disseminate information on secondary market transactions in Section 4(2)/Rule 144A TRACE-eligible securities. Rule 6250(c) codifies the staff's prior interpretive position that such securities would not be disseminated publicly because the securities transactions are not registered under Section 5 of the Securities Act and the securities cannot be freely traded. (A firm's obligation to report such transactions to TRACE remains in effect.)
Rule 6210(h) currently defines an "Investment Grade" security as a TRACE-eligible security rated by an NRSRO "in one of its four highest generic rating categories." In addition, under the current TRACE Rules, "split-rated," although not set forth as a defined term, is interpreted as a security that is classified as Investment Grade by one NRSRO and Non-Investment Grade by a second NRSRO. Rule 6210(i) currently defines "Non-Investment Grade" as a TRACE-eligible security "that is unrated, non-rated, split-rated (where one rating falls below Investment Grade), or otherwise does not meet the definition of Investment Grade" as defined in Rule 6210(h).
NASD amended the terms, "Investment Grade" and "Non-Investment Grade" in, respectively, Rule 6210(h) and Rule 6210(i), and added a new defined term, "splitrated," as Rule 6210(j) to properly classify a TRACE-eligible security and determine if any of the provisions in amended Rule 6250 that require delayed dissemination apply to such security.
The amendments provide a method to categorize TRACE-eligible securities more specifically than Investment Grade or Non-Investment Grade. This is required when, for example, a security is assigned two Non-Investment Grade ratings, but the Non- Investment Grade ratings are not in the same generic rating category (e.g., a security is rated "Ba" by Moody's, which is a rating in the fifth-highest generic rating category, and "B" by S&P, which is a rating in the sixth-highest generic rating category).10
In addition, under Rule 6210(h) and Rule 6210(i) as amended, if a TRACE-eligible security is unrated, for purposes of TRACE, NASD may otherwise classify the security. When TRACE-eligible securities are not rated, NASD will classify such securities as Investment Grade or Non-Investment Grade, then more specifically in a generic rating category for purposes of determining the appropriate TRACE dissemination provision that applies to such securities and for any other provision of TRACE, if applicable. A determination is necessary because the rating (or, otherwise, the classification) of a TRACE-eligible security is a key dissemination criterion under amended Rule 6250. The classification of a TRACE-eligible security is an internal, administrative process of NASD. The staff will classify TRACE-eligible securities as necessary and appropriate and solely for the purpose of administering TRACE.
NASD will classify an unrated TRACE-eligible security by attributing a certain credit quality—i.e., considering the security as if it were assigned ratings reflecting a specific generic rating category—when there is evidence of the issuer's credit quality available in the bond markets. For example, if an unrated TRACE-eligible security is newly issued and the issuer of the security has other, similar debt securities outstanding that are rated, NASD may classify the unrated TRACE-eligible security by attributing to the security the same credit quality that is indicated by the one or more ratings assigned by the NRSROs to the issuer's rated, similar debt securities. In most cases, NASD will look to the generic rating(s) that one or more NRSROs assigned to the issuer's most recently issued and outstanding, similar debt security as the most important factor in determining the classification.
However, there may be instances when a TRACE-eligible security is unrated and there is not sufficient information available to NASD to make a determination, whether the security is newly issued or has been outstanding for some time. In such cases, NASD will classify the TRACE-eligible security as a "Non-Investment Grade" security that is rated B for purposes of dissemination. By treating the TRACE-eligible security as a B-rated security, it will be disseminated according to the most conservative dissemination provisions. NASD believes that this is a reasonable approach because such unrated securities often are considered distressed debt.
See Attachment A for the full text of such changes.
NASD also deleted paragraphs (b) through (d) of Rule 6250 relating to the administration, calculation, and dissemination of "market aggregate" and "last sale" data for disseminated securities, and the treatment of TRACE-eligible securities traded after the TRACE System has closed or on a non-business day. NASD will establish policies regarding the calculation and dissemination of "market aggregate" and "last sale" data, which will be published in Notices to Members and various other media (e.g., TRACE User's Guide and NASD's Web site).
NASD will continue to treat transactions executed after the TRACE System closes and on weekends and holidays that were described in Rule 6250(c) and (d), in the same manner as set forth in the Rule, provided the treatment is consistent with the delayed dissemination provisions in amended Rule 6250 and continues to meet the needs of the marketplace. Information regarding the treatment of such transactions also will be published by NASD.
As noted previously, NASD will implement the amendments to the TRACE Rules in two stages. The following amendments to the TRACE Rules will become effective on October 1, 2004, as Stage One.
- All amendments to Rule 6210
- All amendments to Rule 6260
- Certain provisions in amended Rule 6250 listed below:
New Rule 6250(b)(1)(A) and (B)
A portion of new Rule 6250(b)(1)(C)(i)
Amended Rule 6250(b)(1)(C)(i) requires all transactions in TRACE-eligible securities rated BB or lower to be disseminated immediately upon receipt of the report if the size of the transaction is $1 million or less (par value). All such transactions in a TRACE-eligible security that meet or exceed the frequency standard set forth in Rule 6250(b)(1)(C)(ii) (i.e., the security trades an average of one or more times per day) will be disseminated as of October 1, 2004.11
New Rule 6250(b)(1)(C)(ii)
New Rule 6250(c)
Deletion of paragraphs (a) through (d) of current Rule 6250
The following provisions of amended Rule 6250 will become effective on February 1, 2005, as Stage Two.
- New Rule 6250(a)(1) and (2)
- The portion of new Rule 6250(b)(1)(C)(i) not fully implemented in Stage One
The portion of Rule 6250(b)(1)(C)(i) that was not fully implemented— transactions of $1 million or less (par value) in any TRACE-eligible security described in Rule 6250(b)(1)(C)(i)—that did not meet or exceed the frequency standard in Rule 6250(b)(1)(C)(ii) will be implemented in Stage Two with the dissemination of all such transactions.
- New Rule 6250(b)(2)
1See Securities Exchange Act Release No. 50317 (September 3, 2004), ___ Fed. Reg. __________ (September ___ , 2004) (File No. SR-NASD-2004- 094).
2 In the SEC's order approving the rule filing, the SEC noted "that the two studies commissioned by the NASD to address the relationship between transparency and liquidity found no conclusive evidence that TRACE transparency has adversely affected liquidity. Accordingly, the Commission expects that, not later than November 1, 2005 (nine months after the effective date of Stage Two), the NASD will submit a proposed rule change eliminating the delays in TRACE information dissemination." Securities Exchange Act Release No. 50317 (September 3, 2004), p. 8.
3 A and BBB are ratings of Standard and Poor's, a division of the McGraw-Hill Companies, Inc. (S&P). S&P is a nationally recognized statistical rating organization (NRSRO). S&P's ratings are proprietary to S&P and are protected by copyright and other intellectual property laws. S&P licenses ratings to NASD. Ratings may not be copied or otherwise reproduced, repackaged, further transmitted, transferred, disseminated, redistributed or resold, or stored for subsequent use for any such purposes, in whole or in part, in any form or manner or by any means whatsoever, by any person without S&P's prior written consent.
For purposes of the TRACE rules, any rating of S&P used means the S&P rating and the equivalent ratings of Moody's Investors Service, Inc. (Moody's), an NRSRO, and any other NRSRO whose ratings may be used for purposes of TRACE. Currently, NASD administers the TRACE provisions based on the ratings of S&P and Moody's. The use of a single rating is for the convenience of readers only.
The ratings of the NRSRO, Moody's, are proprietary to Moody's and are protected by copyright and other intellectual property laws. Moody's licenses ratings to NASD. Ratings may not be copied or otherwise reproduced, repackaged, further transmitted, transferred, disseminated, redistributed or resold, or stored for subsequent use for any such purposes, in whole or in part, in any form or manner or by any means whatsoever, by any person without Moody's prior written consent.
4 The amended TRACE Rules do not allow a member to delay the reporting of any transaction. Reports on all TRACE-eligible securities transactions must be filed within 45 minutes of the time of execution. (The period to report such transactions will be reduced, effective October 1, 2004, to 30 minutes, and, effective July 1, 2005, to 15 minutes.)
5 Under Rule 6250(a)(1), when such transaction information is disseminated on the third business day, it will be disseminated in the order of the date and time of execution.
6 Similarly, under Rule 6250(a)(2), the previously withheld transaction information will be disseminated in the order of the date and time of execution.
7 To calculate the average daily trading of a security, which is required to administer Rule 6250(b)(1)(C) and (b)(2), NASD, where applicable, will review a security's trading during its New Issue Aftermarket-10 to determine the appropriate dissemination protocol. That dissemination protocol will remain in effect for the security until the next established calculation timeframe occurs. That calculation timeframe will be based on the trading activity during the last 20 business days of a 90-day period determined by NASD (20/90 period). Unlike a New Issue Aftermarket-10, where the timing is specific to the security, the 20/90 period will be established quarterly and will apply to all Non- Investment Grade TRACE-eligible securities.
8 For example, if a transaction meeting the three criteria (i.e., the transaction is greater than $1 million (par value), the subject security is BB-rated, and such security trades an average of less than one time per day) is executed on Monday, November 15, 2004, at 10:00 a.m. Eastern Time, the transaction will be disseminated on Wednesday, November 17, 2004, at approximately 10:01 a.m. Eastern Time.
9 For example, if a transaction in such a security is executed on Monday, November 15, 2004, at 10:30 a.m. Eastern Time, the transaction will be disseminated on Friday, November 19, 2004, at approximately 10:31 a.m. Eastern Time.
10 As noted above, NASD currently administers the TRACE dissemination provisions based on the ratings of two NRSROs, S&P and Moody's. The amendments to Rule 6210(h) and Rule 6210(i) and new Rule 6210(j) were drafted to allow NASD to consider additional NRSRO rating information, if appropriate. NASD is also incorporating the ratings of Fitch Inc. (Fitch) into the TRACE System, which also will be used to administer TRACE beginning in Stage Two.
11Rule 6250(b)(1)(C)(i) provides for the immediate dissemination of transactions in TRACE-eligible securities that are rated BB or lower and are executed other than during the New Issue Aftermarket-10, if the size of the transaction is $1 million or less. NASD will partially implement this provision in Stage One. In Stage One, NASD will disseminate immediately such transactions in any security for which the larger transactions (i.e., "$1 million plus" transactions) are also disseminated in Stage One (i.e., securities that are traded an average of one or more times per day, as more fully set forth in Rule 6250(b)(1)(C)(ii)). Securities transactions described in Rule 6250(b)(1)(C)(i) that would otherwise be subject to immediate dissemination, but occur in a security that is traded an average of less than one time per day and in which "$1 million plus" transactions are subject to dissemination delays under Rule 6250(b)(2)(A) or Rule 6250(b)(2)(B), will be disseminated in Stage Two, when delayed dissemination has been implemented and all transactions in the security will be disseminated. For example, XYZ Security is rated BB and trades an average of less than one time per day. Under Rule 6250(b)(1)(C)(i), a transaction in XYZ Security for $100,000 would be disseminated immediately if not for the above approach to implementation, but a $2 million transaction on the same day in XYZ Security would not be disseminated at any time during Stage One. NASD will withhold dissemination of the $100,000 XYZ transaction during Stage One because it believes that all market participants will be best served and get a more complete and accurate indication of price when, in a particular security, transactions of all sizes are subject to an operative TRACE dissemination requirement.
Rule 6200. TRADE REPORTING AND COMPLIANCE ENGINE (TRACE)
Rule 6210. Definitions
6250. Dissemination of [Corporate Bond Trade]Transaction Information
NASD will not disseminate information on a transaction in a TRACE-eligible security that is issued pursuant to Section 4(2) of the Securities Act of 1933 and resold pursuant to Rule 144A under the Securities Act of 1933.
Immediately upon receipt of transaction reports received at or after 8:00 a.m. through 6:29:59 p.m. Eastern Time, NASD will disseminate transaction information (except that market aggregate information and last sale information will not be updated after 5:15 p.m. Eastern Time) in the securities described below.
All trade reports in TRACE-eligible securities that are approved for dissemination and submitted to TRACE at or after 8:00 a.m. Eastern Time and prior to 5:15 p.m. Eastern Time will be included in the calculation of market aggregates and last sale except:
Rule 6260. Managing Underwriter or Group of Underwriters Obligation To Obtain CUSIP and Provide Notice
For such [TRACE-eligible securities]new issues, the managing underwriter or group of underwriters must provide to the TRACE Operations Center[, by email or facsimile]: (1) the CUSIP number; (2) the issuer name; (3) the coupon rate; (4) the maturity; (5) whether Rule 144A applies; (6) a brief description of the issue (e.g., senior subordinated note, senior note); and, (7) information, as determined by NASD, [that is required to determine ]to implement the provisions of Rule 6250(a) and such other information NASD deems necessary to properly implement the reporting and dissemination of a TRACE-eligible security[if a TRACE-eligible security must be disseminated under Rule 6250 (e.g., size of issue and rating)], or if any of items (2) through (7) has not been determined, such other information as NASD deems necessary. The managing underwriter or group of underwriters must obtain the CUSIP number and provide it and the information listed as (2) through (7) not later than 5:00 p.m. Eastern Time on the business day preceding the day that the registration statement becomes effective, or, if registration is not required, the day before the securities will be priced. If an issuer notifies a managing underwriter or group of underwriters, or the issuer and the managing underwriter or group of underwriters determine, that the TRACE-eligible securities of the issuer shall be priced, offered and sold the same business day in an intra-day offering under Rule 415 of the Securities Act of 1933 or Section 4(2) and Rule 144A of the Securities Act of 1933, the managing underwriter or group of underwriters shall provide the information not later than 5:00 p.m. Eastern Time on the day that the securities are priced and offered, provided that if such securities are priced and offered on or after 5:00 p.m. Eastern Time, the managing underwriter or group of underwriters shall provide the information not later than 5:00 p.m. Eastern Time on the next business day. The managing underwriter or group of underwriters must make a good faith determination that the security is a TRACE-eligible security before submitting the information to the TRACE Operations Center.